No money topic is too big or too small. Welcome to the Mouthy Money Podcast,…
Read More →
The strange death of the ISA?
The ISA is meant to be a simple product – but this has never really ever actually been the case, editor Edmund Greaves writes.
The ISA is supposed to be one of the great financial products of our times. But the Government (both the current and former iterations) are killing it off.
‘The beauty of the ISA is its simplicity.’ This is one of the first things I was told when I became a financial journalist.
And yes, the idea behind it is simple: you put your money in and it is sheltered from tax forever (until you die and inheritance tax kicks in). Easy.
But ISAs didn’t start life that simply. Nor have they ever really been that simple.
When launched in 1999 by then Chancellor Gordon Brown, it had a split allowance between £3,000 cash and £4,000 for stocks and shares. We in fact didn’t get an ‘equalisation’ of the allowance until July 2014 when George Osborne set both cash and investments at £15,000.
Weirdly enough then, the much complained about cash ISA change of the recent Budget merely takes us back sort of to the pre-July 2014 status quo.
Indeed, the weird ‘Martin Lewis’ carve out for over 65s on the cash element isn’t even unprecedented – in the tax year 2009/10 over 50s were given an additional £1,500 cash allowance while in total they could put in £10,200 vs £7,200 for younger savers.
Aside from the complications of various other types of ISA – Lifetime (LISA) Innovative, Junio etc, the cash and investment components have always been the core of the product.
The Junior ISA was a necessary simplification away from child trust funds. The LISA was a hodge podge attempt to reinvent pensions (which then became a hodge podge help to buy replacement too).
And then the innovative finance ISA is that most useless of dumping grounds for any spicy investments the regulator doesn’t like. It would appear that form the new tax year, this is where bitcoin ETNs will have to sit, for example.
The value of allowances
Where things get interesting is if we start to compare the value of the ISA allowances today compared to how generous they were in the past.
The limit of £20,000 has been in place since 2017/18. Arguably then, the amount of tax-free savings you can make in an ISA has been subject to fiscal drag in the same way as other taxes such as IHT and income tax.
But in fact – the ISA allowances today are MORE relatively generous than they were in 199. According to the Bank of England’s inflation calculator – the £3,000 cash limit in 1999 would be worth £5,802 today. The investment limit of £4,000 would be worth £7,736.
This means that, relatively speaking, we’re still quite generous with the allowance in reality – despite some pretty high recent inflation levels.
The strange death of the ISA
What concerns me now is that alongside the new limits on cash – and attempts by the Government to regulate how people manage that – is going to create the kind of complexity that normal people trying to manage their money hate. Those rules include:
- no transfers from stocks and shares and Innovative Finance ISAs to cash ISAs
- tests to determine whether an investment is eligible to be held in a stocks and shares ISA or is ‘cash like’
- a charge on any interest paid on cash held in a stocks and shares or Innovative Finance ISA
Now for those who are investing in stocks and shares solely, it’s probably not much of a bother. Essentially banning money market funds in investment ISAs is weird though.
The tax charge on cash inside the stocks and shares ISA is a frankly rude complexity. Because for those silly enough to have cash uninvested in a stocks and shares ISA, they’re money is being taxed away by inflation anyway!
These rules also reek of pettifogging over management of the issue. Almost no one agrees that the Government’s stated aims of getting more people investing is going to be met with these proscriptive measures.
In reality we need a cultural shift in the UK that enshrines wealth creation, risk taking and the benefits of investment – not Government interventionism.
This article first appeared on Octo Members
